10–53 Solutions
10.34 continued.
b. Plan (1):
Asset—Cash.
Plan (2): Operating Lease Method: None.
c. $150,000 = $100,000 Depreciation + (.10 X $100,000 X 5) Interest.
e. The method of accounting for a lease affects only the timing of expenses,
interest expense is smaller.
f. (1) $30,000 = $20,000 depreciation + $10,000 bond interest.
g. (1) $30,000.
Solutions 10–54
10.34 g. continued.
CAROM SPORTS COLLECTIBLES SHOP SUMMARY
(Not Required)
2008 2009 2010 2011 2012 Total
Plan 1
Depreciation
Expense ……….. $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 100,000
Plan 2 (Operating)
Plan 2 (Financing)
Depreciation
Interest
10.35 (Northern Airlines; financial statement effects of capital and operating leases.)
(Amounts in Millions)
a. Capital Lease Liability, December 31, 2007 ……………………… $ 1,088
Plus Interest Expense (Plug) ………………………………………….. 102
aA comparison of the commitments under capital leases on December
10–55 Solutions
10.35 continued.
d. December 31, 2008
Interest Expense ……………………………………………….. 102
10–57 Solutions
10.35 continued.
f. Present Value of Operating Lease Commitment on
December 31, 2007
Present Value
Year Payments Factor at 10.0% Present Value
2008 $ 1,065 .90909 $ 968
aAssume that the firm pays the $7,453 at the rate of $815 a year for 9.145
(= $7,453/$815) periods at 10%.
Present Value of Operating Lease Commitment on
December 31, 2008
Present Value
Year Payments Factor at 10.0% Present Value
2009 $ 1,098 .90909 $ 998
Solutions 10–58
aAssume that the firm pays the $6,710 at the rate of $855 a period for 7.848
(= $6,710/$855) periods.
10–59 Solutions
10.35 continued.
g. Long-Term Debt Ratio Based on Reported Amounts:
h. Long-Term Debt Ratio Including Capitalization of Operating Leases:
10.36 (FedUp Corporation; financial statement effects of capital and operating
leases.) (Amounts in Millions)
a. Capital Lease Liability, May 31, 2007 ………………………………. $ 401
Plus Interest Expense: .05 X $401 ………………………………….. 20
c. During Fiscal 2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+10
+10
To record new capital leases signed.
May 31, 2008
Solutions 10–60
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–121
–101
–20
IncSt → RE
To record interest expense on capital leases, the cash
payment, and decrease in the capital lease liability for
the difference.
10–61 Solutions
10.36 c. continued.
May 31, 2008
Depreciation Expense ……………………………………….. 133
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–133
–133
IncSt → RE
To recognize depreciation expense on capitalized
leased asset for 2008.
d. May 31, 2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–1,646
–1,646
IncSt → RE
To recognize rent expense on operating leases for
e. Present Value of Operating Lease Commitment on
May 31, 2007
Present Value
Year Payments Factor at 5% Present Value
2008 $ 1,646 .95238 $ 1,568
aAssume that the firm pays the $7,249 at the rate of $1,045 per period for
Solutions 10–62
10–63 Solutions
10.36 e. continued.
Present Value of Operating Lease Commitment on
May 31, 2008
Present Value
Year Payments Factor at 5% Present Value
2009 $ 1,672 .95238 $ 1,592
bFactor for the present value of an annuity of $984 million for 6.890
cFactor for the present value of $1 for five periods at 5%.
f. Long-Term Debt Ratio Based on Reported Amounts:
g. Long-Term Debt Ratio Including Capitalization of Operation Leases:
Solutions 10–64
10.37 (GSB Corporation; measuring interest expense.)
Solving for BB:
Thus, interest expense for this last six month period equals $5,447.62 (= .05 X